Why Pyramid Schemes Fail

Why Pyramid Schemes Fail

We’re going through a very tough time. Many of us all over the world are currently on some form of restrictions, and we can’t continue our normal activities. The impact of COVID-19 is experienced differently by people; there are many families exposed, many people going through difficulties, it is nice to be good in any way you can to people around you. It’s nice to be good anytime, but the present situation calls for more kindness. 

There are many stories of people doing good, sharing with the needy, helping the elderly and this shows the love we still have despite everything going on. It shows there is hope for humanity.

There are many “viruses” spreading online apart from COVID-19. Misinformation. Be careful and try to always verify the information before sharing (if you need to share it). Having said that, I want to draw attention to many new make-money-from-home schemes flying around, digital entrepreneurship options. I am writing this because I have seen a lot of them spreading online. We need to always be careful. Every good investor does proper due diligence and weighs the opportunity cost and risk of any venture. This is what we all ought to do. I have seen a lot of new options for making money, too many to count. 

I couldn’t look at all of them fully because it would take forever to do that, but a lot of them look like Ponzi(pyramid) schemes. I figured it would be better to find out what characterizes Pyramid schemes, how to spot them from a distance, then one can use that template to analyse any new ones that come your way.

The not-too-distant wave of MMM [1,2] came and swept a lot of people off their feet. A lot of us got involved. Some cashed out, while many others lost large with a lot of stories that touch the heart. The interesting thing is that there is nothing new under the sun, so MMM was nothing new. It was founded by Sergei Mavrodi [3] and his associates, a very intelligent mathematician in the early nineties when the Soviet Union collapsed. There were other schemes before Mavrodi’s, Ponzi is in fact someone’s name – Charles Ponzi, an Italian swindler and con artist who became known in the early 1920s in North America[4]. 

Source: investor.gov

I watched a film Sergei Mavrodi’s based on his story and a couple of interviews he gave. He was out to harness people’s greed. It was said that at some points, people preferred his notes over the official currency! He designed a very brilliant scheme that worked then, still works and will keep working. Although Mavrodi is dead[5], there will be many versions of this scheme popping up everywhere [6]. This time seems to be a good one for fresh schemes as people are at home, some with the capital they want to quickly multiply.

Be careful. Genuine wealth creation takes time, knowledge and patience. Be very wary of anyone coming to promise you a get-rich-quick source. I constantly see a lot of such flying around and have received many links from friends. I always want to take my time and get to understand the value proposition, the financial model, and the product involved.

Pyramid Schemes

What Is a Pyramid Scheme? A pyramid scheme is an illegal investment scam based on a hierarchical setup of network marketing. The most famous kind of pyramid scheme is, perhaps, the Ponzi scheme.

New recruits make up the base of the pyramid and provide the funding, or so-called returns, in the form of new money outlays to the earlier investors/recruits structured above them in the scheme.

 A pyramid scheme does not usually involve the selling of products. Rather, it relies on the constant inflow of money from additional investors that works its way to the top of the pyramid. This means that multilevel marketing schemes are not classified as pyramid schemes and are not necessarily fraudulent. [7].

These are some hallmarks of a pyramid scheme[8]:

  1. Emphasis on recruiting
  2. No genuine product or service is sold
  3. Promises of high returns in a short time period.
  4. Easy money or passive income.
  5. No demonstrated revenue from retail sales.
  6. Complex commission structure.
  7. All Pyramid Schemes Collapse. The question is when.

All pyramid schemes eventually collapse, and most investors lose their money. The question is when?

I didn’t mention any schemes here, not because there aren’t any I am suspecting and almost certain that they are pyramid schemes, but because I could be wrong in some cases, and I generally want you to decide for yourself. The least you could do is google and check 2-3 external links about it and immediately you will get a picture. There are many legit ways to invest out there and a quick google search can show you that they exist, even in Nigeria. So again, I won’t mention any. You should decide for yourself.

You can read about other types of fraud[9] and how to protect your investments[10] from the U.S Securities and Exchange Commission. Keep learning, and stay woke!

Disclaimer: I am not an investment expert but a learner. The main message I have is – do your due diligence before putting down your money into any investment.

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